May 29 (Bloomberg) -- Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia, said euro-area authorities will do all they can to prevent a breakup of the 17-nation currency bloc.
“While you could make the case that Greece should leave because it gets its currency flexibility back, the ultimate arbiter will be political considerations,” Roach said in an interview with Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance” today. “On that basis, Greece will stay in and European leaders will do everything in their power to keep the monetary union intact.”
Greece is due to hold new elections next month after an inconclusive May 6 ballot led to a political impasse and raised speculation the country may leave the 17-nation currency zone. At the same time, Spanish borrowing costs are rising as its government tries to find a way to shore up Bankia without overburdening the public finances.
“Spain is definitely too big to fail and it’s probably too big to bail,” Roach said. He also said that if a country were to exit the euro area, that could lead to a chain reaction where the focus “immediately is on the next, the next and the next.”
“It’s a cascading contagion that would lead to something well beyond even the most widely articulated disorderly breakup scenarios,” he said. “This would be a disaster for Europe, the markets and I don’t think that will occur.”
On the outlook for the Chinese economy, Roach said it still has capacity to “surprise.” A survey today showed China’s rising labor costs and a deteriorating regulatory environment are prompting almost a quarter of European Union companies to consider shifting investments to other countries.
That presents additional challenges to leaders of the world’s second-largest economy trying to sustain growth. China is forecast to expand 8.2 percent this year, based on the median estimate of analysts surveyed earlier this month by Bloomberg News. That would be the least since 1999.
“While the Chinese economy is slowing, for the year as a whole, I still am holding the view that it will be 8 percent or even higher,” Roach said. “There is a lot of policy ammunition that the Chinese have that I think will be deployed over the course of the year.”
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